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Smart ESG Integration: Factoring in Sustainability

Smart ESG integration is an advanced ESG integration method developed by RobecoSAM's Quantitative Research team.

In a first step, an improved sustainability score is set up in terms of a predictive model of expected investment success. Significant evidence from RobecoSAM's comprehensive sustainability database is incorporated into the model, while biases induced by the heterogeneous and diverse nature of sustainability data are effectively removed, leading to more explanatory and predictive power of the resulting score.

In a second step, the smart score is used to establish a respective sustainability investment factor. Using multiple cross-sectional regression for factor estimation allows for the simultaneous control of other relevant model factors (e.g. country, industry, currency, beta, size, value, momentum, etc.) - and the application of the new factor in attribution reports, i.e., the direct attribution of portfolio risk and return to the new sustainability factor.

Finally, the risk and return profile of the sustainability factor exhibits low risk, considerable information ratio, and low correlation to other common risk factors. It is therefore a promising candidate for use in factor models with multiple sources of risk and return.

Read the paper here.